I'm hearing some buzz about the Disney owned website for kids called Club Penguin. You have to pay for membership though which I would personally want to avoid doing.
I'm not sure how this compares with the ever popular Webkins or the new Build A Bear site BuildaBearVille. I know my niece used to really like playing on Neopets. (You should see what she's up to now - check out her Disco Alien T-shirt for sale on Cafepress.com!)
I am not ready to have to pay for a site membership for my rugrats, I think there's some really good free content out there for kids without having to pay the Mouse.